Digital Economy Act: all change for the telecoms industry…

On 27 April 2017, the Digital Economy Act, which includes the new Electronic Communications Code (the New Code) received Royal Assent.  In the end, the Act had to be rushed through Parliament before it dissolved at the beginning of May, following the announcement of a snap general election. It is not yet clear when the New Code will come into force but it is unlikely to be before the associated codes of practice and new template documents, which are under consultation until 2 June, are finalised.

The New Code is intended to provide modern regulation to fully support the rollout of digital communications infrastructure. Vast changes in digital communications have taken place since the Code was first established in 1984, and updated in 2003.  The New Code is intended to take account of the development of new technologies and increased demand for services over the past 30 years, and pave the way for future technological evolution.

The key changes in the New Code that give effect to those intentions are:

• reforms to the rights that operators have to access land;
• changing the basis of valuation to reflect the value to owner principle; and
• ensuring that property owners will be fairly compensated for the use of their land, whilst acknowledging the economic value for society created by investment in digital infrastructure.

Does the New Code achieve the government’s intentions? We examine seven key areas of change below.

1. Regulation of the relationship between operators and wholesale infrastructure providers

Wholesale infrastructure providers (WIPS) such as Arqiva, who are registered operators with OFCOM, will have protection under the New Code, as against site providers; however, operators will no longer have code rights against WIPS, or against other operators where they are sharing. The intention instead is that those relationships will be regulated by the codes of practice currently under consultation.

2. Security of tenure

All new agreements  entered into under the New Code will fall outside the security of tenure provided by the Landlord and Tenant Act 1954, if the primary purpose of the agreement is to grant code rights. Such agreements will be purely governed by the New Code, which will simplify the statutory regime for site providers and operators alike. This is not, however, retrospective.  There is no definition of “primary purpose” and the transitional provisions are unclear.

3. Extended code rights

There are three areas where new rights are provided for operators, which on the face of it have the potential to deliver significant benefits. The way those rights are qualified, however, will inevitably create difficulties in making use of those rights in practice.

The new rights will only be available for code agreements entered into after the New Code comes into force. They will not have retrospective effect for existing agreements. The new rights are:

Assignment (paragraph 16):

Any provision in a code agreement preventing assignment of that agreement to another operator, or making it subject to conditions, will be void.  However, this will not apply to a term requiring the assignor to enter into a guarantee agreement in respect of the assignee’s obligations whilst that assignee is liable under the agreement. Making code agreements freely assignable as between operators will clearly be a helpful change.

Sharing and upgrade rights (paragraph 17):

An operator can upgrade its electronic communications equipment (ECA), or share the use of it with another operator, without needing the site provider’s consent. Any attempt to impose a consent requirement, or conditions, will be void. However, these rights are subject to two important conditions which need to be met for an operator to be able to share or upgrade freely:

• any changes to the ECA from the sharing/upgrading have no, or no more than minimal, adverse impact on its appearance; and
• those changes impose no additional burden on the site provider. Additional burden includes anything that has an adverse effect on the site provider’s enjoyment of its land or causes additional loss, damage or expense to the site provider.

On the face of it, the free right to share and upgrade addresses concerns that operators might have over their ability to increase the extent and quality of network coverage. The conditions imposed will no doubt severely hamper that right, however. Most upgrades will inevitably require additional equipment, giving the site provider an argument under the first condition; and any sharing, for example, will surely increase access requirements to the site, with more operators needing to maintain their ECA, which will give site providers arguments under the second condition.

How a court might approach the interpretation and application of these conditions remains to be seen, but at first blush these new rights are not the panacea the industry had been looking for from the reforms.

4. Acquiring new rights

The process (paragraph 20):

There are some similarities with the current process under the existing Code for seeking new rights.  There are, however, some significant differences; some will assist operators, others most certainly will not.

The operator triggers this process with service of a notice setting out the code rights and all other terms it seeks from the site provider. If the site provider does not agree to confer those rights within 28 days, the operator can apply to court to ask the court to confer those rights.

The test (paragraph 21):

The test the court will apply on an application under paragraph 20, shares some similarities with, but has one key difference from, the existing paragraph 5 test.

As under the existing Code, the court can make an order under paragraph 20 of the New Code if two conditions are met (referred to in the New Code as the “paragraph 21 test”):

• the prejudice caused to the site provider by the order is capable of being adequately compensated by money; and
• the public benefit likely to result from making the order outweighs the prejudice to the site provider. In deciding whether this condition is met the court must have regard to the public interest to a choice of high quality electronic communications services.

The key difference in the new test is that the court may not be required to make an order under paragraph 20 if it thinks that the site provider intends to redevelop all or part of the land to which the code rights would relate, or any neighbouring land, and cannot reasonably do so if the order is made (paragraph 21(5)).

There is no guidance on how a court might approach this “defence” and what the evidential burden might be for a site provider in establishing intent. One can only assume the court may apply a similar approach to that applied when considering a ground (f) opposition to a lease renewal under the LTA, but there is no indication as to the relevant date for the site provider to prove the intention to redevelop within paragraph 21.

5. Interim and temporary rights

Temporary Code Rights (paragraph 27):

The current Code affords the ability to seek temporary rights in respect of existing equipment, pending determination of an application under paragraph 5. This mechanism is replicated to an extent in the New Code, provided that the request for Temporary Code Rights is contained in the paragraph 20 notice initially served.

This allows an operator to maintain the network in that interim period, and if any such rights are urgently required, the operator can apply for Temporary Code Rights before the 28 day notice period under paragraph 20 has expired. The court does, however, have the power to award consideration/compensation payments to reflect those rights (paragraph 27(4)).

Interim Code Rights (paragraph 26):

These are new and follow a similar process to the acquisition of Temporary Code Rights summarised above.

An order for Interim Code Rights will allow an operator to secure access to a wholly new site when there is no existing apparatus, or against a different party in respect of existing apparatus. Because of the consequences of this for site providers, the court will only be in a position to grant such rights (where the site provider will not agree them voluntarily) if the court considers there is a good and arguable case that the paragraph 21 test will be met by the operator.  One can see use of the redevelopment “defence” being raised in such circumstances by site providers to resist such an order.

6. Termination and removal

There will be two steps under the New Code for site providers to recover possession of a site from an operator, rather than the paragraph 20 or 21 process currently in force; first the termination process, and then the removal process.

Termination of a code agreement (paragraph 31):

This will apply when either the fixed term of the code agreement has expired or a break/termination notice has been served under the terms of the agreement. Until there has been an application by the site provider and order made by the court, the operator maintains all of the rights in the code agreement (paragraph 30(2)).

To terminate an agreement, the site provider must serve notice (paragraph 31(2)); the notice should specify the date on which it proposes that the agreement will come to an end and (importantly) the ground on which it should be brought to an end.

There are two significant changes: firstly the period of notice and secondly that there needs to be a ground.

In terms of timing, the notice must be a minimum of 18 months and cannot expire any earlier than the end of the fixed term or break date. This is considerably longer than the 28 days’ notice currently required under either existing paragraphs 20 or 21.

The grounds will be familiar; these are:

• substantial breaches of the operator’s obligations in the agreement;
• persistent delays in making payments under the agreement;
• the site provider intends to redevelop all or part of the land on which the site is located, or neighbouring land, and cannot reasonably do so unless the agreement comes to an end; or
• the operator is no longer entitled to the agreement because the paragraph 21 test is not met.

In trying to replicate some of the grounds of opposition under the LTA, the likelihood is that the court’s approach to those grounds where a site provider seeks to terminate will be similar to that currently applied when considering those LTA grounds. However, as regards the third ground, there is no date specified on which the site provider must make good that intention –  unlike the requirement in the LTA being on the termination of the tenancy.  So how will the court approach the timing of that intention?

Once notice is served, the agreement will come to an end in accordance with its terms, unless the operator:

• firstly, serves a counter-notice within three months; and
• secondly, applies to court for an order under paragraph 34, within three months from serving its counter notice.

It is therefore imperative that the operator takes both steps within those time frames. Not only is the timing different in comparison to the 28 days for a counter-notice currently; the positive requirement to issue proceedings is also new.

If, on the application by the operator, the court decides that the site provider has substantiated any of the grounds, it must order that the agreement comes to an end.

What happens when a ground to terminate is not shown (paragraph 34):

The court has a menu of orders it can make. It can order the existing code agreement to continue unchanged, or to be replaced by a new code agreement; or alternatively, for the existing agreement to be modified in some way. The court must take into account certain factors in deciding which order to make (paragraph 34(13)).

Removal (paragraph 40):

Once an order for termination is made under paragraph 31, there is then a separate notice procedure, with further proceedings necessary, in order to secure removal of the ECA from the site (paragraph 40(2).

The notice is to require removal of the ECA, and restoration of the land, within a specified period, which must be reasonable.  If, within 28 days of that notice, the site provider and operator do not reach agreement on the fact of, or timing of, the removal of the ECA and/or restoration of the land, the site provider can apply to court for an order requiring the operator to remove the ECA or permitting the site provider to remove and sell the ECA. If the former order is made, and the operator fails to comply, the site provider can apply for the latter order. There are further detailed provisions around removal (paragraphs 40 and 41).

Whilst the site provider may be prejudiced by the length and cost of this two stage process, it will have the right to seek compensation for any losses suffered in the period after a termination order comes into effect, and up to the date of removal or the ECA.

One question not covered in the New Code is whether, at this late stage, an operator could throw a spanner in the works by serving a notice under paragraph 20 to acquire new rights.

7. Consideration and compensation

Consideration (paragraph 24):

This is the final area of significant change.

The relevant points for assessment of consideration are that:

• it is to be an amount representing the market value of the site provider’s agreement to confer the code right(s) (not the value to the operator);
• the right(s) the transaction relates to does not relate to the provision or use of an electronic communications network;
• value must be assessed on the assumption that there is more than one site which the operator could use, even if that is not the case, so no uplift can be applied for scarcity; and
• it is to be assumed that the rights under the New Code to assign, upgrade and share do not apply.

The upshot of this would appear to be the potential for falling rentals for operators to reflect this new regime. However, there are anomalies in the drafting, so how this will be applied in practice remains to be seen.

The court can order consideration to be paid in a lump sum, periodically, on the occurrence of a specified event or in such other form as the court may direct (paragraph 24(4)). Currently, annual payments are the norm, except for cable rights, where lump sums may also be agreed, to reflect long term rights being granted.

Compensation (paragraph 25):

The New Code will operate in a similar way to paragraph 7 of the existing code; compensation is to reflect damage sustained by the site provider as a result of the exercise of code rights granted to the operator. Payment of compensation for loss or damage includes a power to order payment of expenses, diminution in value of the land and costs of reinstatement (paragraph 84).

As with consideration, the court can order payment of compensation in a lump sum; by periodic payments, the occurrence of an event or in some other way. In addition the court can order compensation either when an order is made under paragraph 20 or at any time after that date on the application of the site provider.

Conclusion

Whilst there are some improvements in the New Code over the existing Code, the clarity sought, by operators and site providers alike, is not necessarily present. There are areas where the New Code has left uncertainty in respect of important principles; notably the conditions to be met for the rights to upgrade and share and the timing for proving intent under both the redevelopment “defence” to a paragraph 20 application, and as a ground of termination.

Unfortunately, therefore, the New Code looks set to disappoint in terms of achieving the government’s stated intentions, as the poor drafting may make the New Code equally as difficult to apply as the existing code.